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Worried About Being Audited? Here’s Some Good News

Surprise -- audits are actually not so bad. And not too common, either.

Tax season is upon us once again, bringing with it the usual worries: Will I get my return filed on time? Am I forgetting to include anything? Will I owe money or get a refund? Will I get audited? It's natural to worry about a tax audit, as it seems like a very bad thing. But you shouldn't worry too much -- for several reasons.

Better oddsFor starters, your odds of being audited are not great to begin with, and they've recently become more remote. In fact, according to the IRS, its audit rate for tax returns of individuals dropped to 0.86% last year, the lowest level since at least the fiscal year 2005. During the past decade, the audit rate rose until 2010, and then plunged by 21% during the next five years.

Here are some concrete numbers: In 2014, 1.24 million tax returns were audited, 11.4% fewer than the year before. Note that most of them were conducted through the mail, and were not the kind where you sit face-to-face with an IRS agent. Those are called "field audits," and only 292,000 of them were performed in 2014, down 15%. One group of taxpayers who actually saw their audit rate increase -- by 4% between 2013 and 2014 was those earning more than $200,000.

Why the drops? Well, much of the reason is simple: Congress has been cutting the IRS's budget repeatedly in recent years, which has led to staffing cuts. The IRS pool of revenue agents has shrunk by 2,200 since 2013, to the lowest level in a decade. Here's the crazy part: According to IRS Commissioner John Koskinen, each such agent brings in far more than he or she costs to employ – about $1.2 million. Thus, cutting the IRS budget and shrinking its work force is not really saving money – it's reducing the revenue that the IRS brings in from people who legitimately owe money to the government and, therefore, to us taxpayers.

Even if you do get audited...To worry less about being audited, remember this: If you're not trying to pull a fast one over on Uncle Sam, even if you're audited, it's not likely to be a big deal. The IRS will probably send you a letter questioning some aspect of your return. If you made a mistake, you can fix it, perhaps having to pay a penalty or some interest. If not, you can just substantiate whatever claim they're questioning by providing evidence.

Remember that audits often get triggered when a part of a return doesn't fit a typical pattern. If you're claiming charitable deductions that are much more than those with similar incomes tend to claim, the IRS might question it. If so, you just need to present your records and receipts. It's the same if the IRS questions, say, your outsized travel, meals, and entertainment expenses for your small business, or your home office deductions.

Some ways to avoid audits are by filling out your return neatly and legibly if you're doing it by hand, and by reporting all income, such as from dividends, capital gains, alimony payments, gambling winnings, and so on.

Double-check your math, as errors can lead to audits. Source: Flickr user MoneyBlogNewz

Remember, too, that audits are actually a good thing. If they didn't exist, more people would be trying to cut corners or cheat on their returns, depriving the government of needed and owed funds. If you're paying your fair share of taxes, you probably don't want some other guy getting away with paying less than he should. Audits can motivate him not to cheat, or can catch him if he does.

Audits are actually goodDon't worry too much about getting audited. It's not likely to happen to you; and even if it does, it probably won't be as bad as you fear.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian